IMPORTANT NEWS: Build Back Better Bill Restricts Back Door IRA and Mega Back Door Roth 401(k)
In a significant development for retirement savers, the recently proposed Build Back Better Bill has brought forth new regulations that could affect the popular strategies known as Back Door Roth IRAs and Mega Back Door Roth 401(k) plans. As we navigate the ever-evolving landscape of retirement legislation, it is crucial to understand the potential implications these changes might have on retirement planning for high-income earners.
Understanding the Back Door Roth IRA and Mega Back Door Roth 401(k)
Before diving into the new changes, let’s clarify these two concepts:
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Back Door Roth IRA: This strategy allows individuals who exceed the income thresholds for direct Roth IRA contributions to still benefit from tax-free growth by first making a nondeductible contribution to a traditional IRA and subsequently converting those funds to a Roth IRA.
- Mega Back Door Roth 401(k): Similar to the Back Door Roth IRA, this strategy enables high-income earners to contribute significantly more to a retirement account through after-tax contributions, which can then be converted to a Roth IRA. This method takes advantage of the higher contribution limits of 401(k) plans.
The Build Back Better Bill
The Build Back Better Bill, part of President Biden’s economic agenda, seeks to address various economic inequalities and increase tax revenues to fund social programs. A key aspect of the bill targets high-income earners and their ability to avoid tax liabilities through loopholes in retirement account contributions.
Among several proposed changes, restrictions on the Back Door Roth IRA and the Mega Back Door Roth 401(k) stand out as significant alterations that could limit the retirement tax strategies available to affluent individuals and families.
Proposed Changes
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Limiting Roth Conversions: One primary focus of the new legislation is to impose restrictions on Roth conversions for high-income earners. The bill suggests that individuals earning above a certain income threshold (most likely households exceeding $400,000) would be barred from converting traditional IRAs to Roth IRAs. This effectively eliminates the Back Door Roth strategy for a substantial portion of the population.
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Eliminating After-Tax Contributions: In addition to restricting conversions, the bill may also eliminate after-tax contributions to 401(k) plans for high-income earners. This would directly impact the Mega Back Door Roth 401(k) strategy, making it less accessible for those looking to maximize their tax-advantaged retirement savings.
- Effective Date: If passed, these restrictions could take effect as early as 2022, leaving individuals with limited time to adjust their retirement planning strategies.
Implications for Retirement Savers
These proposed changes have serious implications:
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Increased Tax Burden: High-income individuals who have relied on these strategies may find their tax burdens increasing, making long-term retirement planning more complex and less beneficial.
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Reassessment of Retirement Strategies: Individuals may need to reassess their overall retirement strategy in light of these changes, considering alternatives that align with their financial goals without taking advantage of these newly restricted avenues.
- Market Reaction: The financial markets may respond to these legislative changes, as investors reevaluate the impact on retirement savings products and strategies.
Conclusion
The Build Back Better Bill’s proposed restrictions on Back Door Roth IRAs and Mega Back Door Roth 401(k) plans signal a notable shift in the tax treatment of retirement accounts for high-income earners. As these changes unfold, it is essential for individuals to stay informed and consult with financial advisors to understand the potential impacts on their retirement planning. Keeping abreast of legislation is critical, as every decision made today can have lasting implications for future financial security. Keep an eye on this evolving situation as it continues to develop in the coming months.
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Thanks for the summary. I read through the bill and this summary helps.
So God forbid if it passes, I won't be able to convert my after tax 401 (Roth) to after tax IRA (Roth)? What when I leave employment and want to convert?
@Mat: so is the 10 million adjusted for inflation?
Or are we looking at a situation where retirement accounts just won't be able to support Growth-Based living at all for the younger generation
Fucking Democrats!!!!!
Great informative video. I had high hopes for the backdoor Roth.
Let's go BRANDON!
If anybody's got 10 million in their bank account unless they have stage 4 cancer they're sitting pretty and can pay just about anything life throws at them
FJB
The $10mil cap is only for those with income over $400k income though right? If you are retired with less than $400k income you can have over $10mil in a Roth IRA with no issues I believe.
Mat, So we can still invest in real estate and alternative investments in solo 401? How about the real estate investment between two or more investors by using their solo 401 k, HSA, and Defined Benefits plans?
Let's Go Brandon
Appreciate the update. Thank you, Mat!
We know they've been considering wealthy people as those making over $400k. It's like they used the 4% rule on a $400k annual income to determine this $10 million cap on retirement accounts. They're just trying to get back at Peter Theil for turning his Roth IRA into $5 billion.
Can you still contribute non-deductible after tax money into a traditional IRA? How about contributing after tax employee contributions to solo 401k? And maybe hope for the rule to change in the future and in the meantime just have tax deferral for any realized gains.
It still has to go through the Senate soooo…theres that. No law yet
Thank you for the quick update .
Thanks for the info, Matt! I'm still trying to catch one of your live videos. Happy Thanksgiving!
Great news on those that impact the SDIRA. Bummer for the back door ROTH. Thanks for the update Mat!
Thanks for the update, Matt!